Public Bill Committee

[Mr. Roger Gale in the Chair]

Roger Gale: Good afternoon, gentlemen. We shall do our best to expedite business before the roads start to freeze. I note that a number of Members have the far frozen west and the far frozen midlands to go to, and I am told that England is covered from the Isle of Thanet. We will do our best to make progress without interfering with the due course of democracy.

New Clause 22

None

“The Secretary of State shall establish an independent commission to evaluate the future terms, benefits and financing of public sector pensions.”.— [Mr. Laws.]

Motion made [this day], That the clause be read a Second time.

David Laws: Welcome back to the Chair for the final furlong, Mr. Gale. We have just five fences to clear before we have an opportunity to get home before, as you say, Britain freezes over.
This morning we were discussing public sector pensions, and I invited members to back the recommendation of the cross-party Work and Pensions Committee. We touched on the rather limited nature of the reforms that the Government have so far made to the public sector pension architecture, and the rather different things that Ministers have said in different places about their enthusiasm for reform.
It is fair to acknowledge that a number of the public sector pension schemes have been reformed recently. Some of the reforms are still in the process of being agreed and to a small extent these will trim the cost of public sector pensions in the years ahead. Nevertheless, the figures that I gave this morning for the rising cost of public sector pensions were the costs after reform. So there is still a significant increase in the costs.
As a result of the manner in which the Government have sought to deliver many of the reforms, many injustices have arisen. For example, for a Government who claim to be very female-friendly in their pension policy, it is rather odd that it has been agreed that all existing public sector employees will be grandfathered in relation to their ability to take public sector pensions at an early age. Even individuals who had not joined the public sector when the agreements were struck with the Government will be grandfathered in that sense, or one might say pre-grandfathered.
The people who will pay the price of these reforms, therefore, are the individuals who will join the public services in the future. The reason why that may be unfair to women is that women are far more likely to have career breaks; they may be in the public service now but may need to take a career break and return to it in the future. As I understand it, many of those individuals will lose their entitlement to retire early at 60 and find themselves disadvantaged compared with male members of the same public services who joined at precisely the same time.
The hon. Member for Northampton, North raised this morning the important differences between many of the public sector schemes, and I think it is worth touching on them for a moment. It would be wrong to think that all of the schemes are the same in their characteristics and costs. That is one of the reasons why it would be particularly sensible to establish a commission to look into the issue so that we distinguish clearly between those public sector pension schemes that are more unaffordable and those that are more affordable.
It is worth saying that, of all the public sector pension schemes, only two to my knowledge are funded and therefore have a funding discipline. One of them is the local government pension scheme and one of them is our own, although a sense of discipline in our own is somewhat undermined by the fact that the taxpayer simply fills up the hole in the funded scheme, whatever that may be. The hole at the moment approaches a contribution of 27 per cent. of our salaries. I have managed to ask a number of parliamentary questions recently on how the employer contribution rate varies between schemes. In other words, this is the percentage of salaries that effectively are contributed by the general taxpayer. This seems a more sensible way to look at affordability and fairness issues in public sector pensions than simply looking at the issue of the unfunded liability, which does not necessarily tell us very much in terms of how sustainable and affordable public sector pension schemes are.
So there is an enormous gulf between the employer contribution rates for different schemes. When comparing the public sector and private sector pension schemes and assessing whether or not they are fair, it is sensible to compare the employer contribution rates of both. We know that, in crude terms, the private sector has a lot of defined-contribution schemes, where average contribution rates are about 7 per cent.—the Minister might have a better figure on that. The average contribution rates in private sector defined-benefit schemes are about 13, 14 or 15 per cent., whereas the lowest public sector employer contribution rates are about 13 or 14 per cent. Such rates apply to the pension schemes for local government, teachers and nurses. At the top end, the employer contribution rate to the judges’ pension scheme is slightly less than 30 per cent. of salary. The figure for the MPs’ scheme is slightly less than 27 per cent., and the scheme figures for the police and the firefighters are 24.6 and 26.5 per cent. respectively.
There is an enormous gulf between the different schemes. Some may require relatively little adjustment and reform in the future such as the local government scheme, which is funded and appears to have quite a low employer contribution rate, whereas it appears that others will need a lot more reform. In discussing reform of the larger and, apparently, more expensive public sector schemes, we need a debate about how long we expect people in the public sector to remain in work in the future.
Traditionally, the pension schemes for firefighters, police and the armed forces were expensive because individuals who went into the schemes in those professions had low retirement ages. Until quite recently, it was possible for a police officer who joined when they were 18 and a half to retire at 48 and a half with a full pension. That represents an interesting public policy issue for the Government. At a time when we are trying to encourage people to work longer, should we expect people in the public services who have physical and demanding jobs to be able to access a pension relatively early on in their working lives or should they be looking to make other changes and to take up other employment opportunities?
 The same things apply to other areas, such as the armed forces. Understandably, people do not necessarily stay on in the SAS or in other strenuous jobs until they are 65, 66 or 67. In the previous armed forces pension scheme, it was possible to retire with a full career pension at 55. Those who had completed 16 years as an officer or 22 years in the ranks—I am not sure why an officer was able to retire six years earlier than somebody in the ranks, but those were the rules—were entitled to an immediately payable pension.
There are some big issues to address, including the costs of different schemes; how long we should expect people in the public services to work; and whether we should continue with final salary schemes, which can be very inflexible in terms of labour mobility, or whether we should move to career averaging schemes. Given that we have had such an extensive debate on pensions, it seems bizarre that we should be leaving out proper scrutiny of this particular area.
 I should have thought that there was a lesson to be learned from the Pensions Commission. We brought in an independent and respected group of individuals representing a range of opinions and experiences—in this case, the unions, business and academia—to report on this area. Such a group is in a strong position to look into contentious issues and clear the confusion that often exists about the statistics and the facts. It can then make recommendations for reform that can command the sort of cross-party support that will be needed to make such contentious changes much easier in the future.
I am little surprised that the Government have been so conservative and so unwilling to move in this area. I can only think that there is nervousness about the guarantees that have been given to the public sector unions. I hope that in the near future there will be a more positive Government line on the issue and a greater willingness to open up the public sector schemes, in the cause not of devaluing them to the lowest common denominator in the private sector but of ensuring that they are affordable and sustainable in the future. They should be fair to hard-working public sector employees and to those working in the private sector who are paying increasing amounts of tax to fund the public sector while the value of their own pensions dwindles away.

John Penrose: I rise to support the new clause because, apart from the fact  that it is right, I am a member of the Select Committee that proposed it and my name is on the amendment paper. It would therefore be inconsistent of me not to support it.
The hon. Member for Yeovil has given a good, lengthy overview of the arguments that we rehearsed in the Select Committee. [Interruption.]

David Laws: The short version.

John Penrose: I am pleased to hear it. I will not repeat the hon. Gentleman’s excellent tour d’horizon on the matter, but I will re-emphasise one of the points he made and add some others. It is important to remember that the commission proposed by the Select Committee would not be some kind of quango to which a difficult decision could be shuffled off so that it was kicked into the long grass by the Government. We proposed something along the lines of the Turner commission, which is a heavyweight, academic and seriously well-qualified body, to clarify and improve the quality of debate on pensions.
The hon. Member for Yeovil said, rightly, that too often this topic is politically controversial and the so-called debate ends up being a shuffling of people’s prejudices. The Turner commission managed to move away from that and turned the wider pensions debate into a structured, logical, evidence-based process. It was an essential part of the Government’s managing to fashion an admirable degree of political consensus on a very difficult issue which successive Governments have found impossible to solve.
 Public sector pensions are no less controversial and complex than others. The hon. Member for Yeovil explained some of the differences between the schemes, and I am sure there are many that he did not mention. Constructive and careful laying of the groundwork would be an essential first step if an intelligent decision—perhaps even a consensus—were to be achieved. That is why the Select Committee suggested the new clause, and I commend it to the Committee. I hope that hon. Members on the Government Benches can bring themselves to support it and that Opposition Members will also vote for the new clause if the hon. Member for Yeovil decides to divide the Committee on it.
 The Government have been admirable in establishing the wider pensions consensus—a process in which many people participated. The new clause gives them an opportunity to underpin and strengthen that consensus if they get the issue right. But if they duck it, or allow a debate on public sector pensions to be just a shuffling of people’s prejudices, there is a risk that the moral authority that has been created around the pensions issue will be eroded. The Government, as the employer of people who work in the public sector, need to be seen to be putting their own house in order.

Andrew Selous: I am listening to my hon. Friend, as is the whole Committee, with great interest. He makes some valid points; we do not want to become two nations in respect of pensions. Was it a consideration of the Select Committee that a commission such as that proposed by the hon. Member for Yeovil would be very careful about retrospective legislation? Many of our constituents are rightly concerned about that matter.

John Penrose: That is clearly one of the critical issues that a commission such as that proposed in the new clause would have to deal with. My hon. Friend is absolutely right to say that all of us will have been lobbied by public sector employees of one sort or another in the past over the question of their pensions, their pay and conditions, and in particular the question of retrospectivity on their accrued pension rights to date.
To come back to the point about moral authority, if the Government, as the lead public sector employer, cannot put their own house in order, the moral authority created through the good work that has been done in constructing the pensions consensus that we have today will be eroded. It will be very difficult for any Government, be it the current Government or potentially a Conservative Government, to say credibly that a consensus on pensions is being maintained, if with one breath they are lecturing the voters as a whole—and the private sector world in particular—about the importance of adjusting retirement ages and so on to ensure that pension schemes are sustainable and sensible, and with their very next breath taking a slightly different approach to public sector pensions, or perhaps ducking an important issue in relation to them. It is essential that there is seen to be some fairness between public and private realms, and it is essential for the Government to take the lead on this, because otherwise their ability to lead the pensions debate overall will be damaged.
The hon. Member for Yeovil and my hon. Friend the Member for South-West Bedfordshire made a point that I want to emphasise as crucial above all else. Put simply, it is that we run the risk here—there are already straws in the wind of the debate—of creating a two-nations system. We run the risk of having two systems, one public and one private—the public one being, in the minds of private sector workers, overly generous, with a series of schemes that they could not possibly aspire to themselves, while public sector workers are concerned that they will end up losing out on rights that they have fought long and hard to accumulate over time. That would be extraordinarily divisive and would inevitably be an opportunity for the shuffling of prejudices that we have already described.
If, on the other hand, we have a commission that is designed to shed light on this complicated and potentially divisive issue, we shall have an opportunity to avoid that two-nations approach. By creating the analysis and providing the structured debate that we have enjoyed from the Turner commission, a commission could save this Government, or a future Conservative Government, a great deal of pain by ensuring that any proposals that it makes—to be judged by the Government on their own merits—are properly thought through, carefully balanced, and above all fair between the private and public sectors. I hope that the Committee will support the new clause.

James Plaskitt: I, too, welcome you to our proceedings this afternoon, Mr. Gale.
 Between the hon. Members for Yeovil and for Weston-super-Mare, we have just been treated to a variety of arguments in favour of the commission that the new clause advocates. I shall summarise them and then try to respond. I sense that the argument of the hon. Member for Yeovil turned largely on the call for more facts and, as he put it, overcoming confusion, whereas that of the hon. Member for Weston-super-Mare was slightly different and slightly more moderate—it was about improving debate on the issue. He spoke about shedding a bit of light on the matter, and suggested that there were, perhaps, inconsistencies between private and public sector pensions. In response, let me deal with the arguments that have been advanced for going down this road.
 I remind the Committee that a number of mechanisms already exist in order to ensure the transparency of public sector pension scheme financing, and to allow scrutiny of the schemes by Members of this House and of course the wider public. Resource accounts covering the major public service unfunded pension schemes are produced annually, and are publicly available. Actuarial valuation reports for the main public service schemes are produced every three or four years and are also publicly available. These documents are prepared to the highest professional standards, and the fact that they are made public ensures transparency and provides the opportunity for detailed scrutiny.
 Alongside resource accounts and scheme valuation reports, which both look at the accrued rights of scheme members, the Government annually evaluate the financial sustainability of spending on public service pensions in the long-term public finance report issued by the Treasury. The latest report, published alongside the pre-Budget report last December, makes it clear that long-term spending on these pensions is affordable and sustainable. It increases from the current figure of 1.5 per cent. of GDP in 2005-06, to an expected 2 per cent. in 2055-56, which is somewhat different from the figure given by the hon. Member for Yeovil.

John Penrose: Of course the information that the Minister is describing is available, as it was for all the other sorts of pension and the entire pensions system, which was considered by the Turner commission, which was not established simply to review that information, but to frame and analyse it and make proposals. That was the vital building block on which the current pensions consensus was constructed.

James Plaskitt: Yes, but my point was that this information is available for anyone to look at and assess—indeed, they regularly do. There is also an issue about what additional information an independent commission could have to do its analysis that does not already exist. I am not sure that there is any unique insight that could be brought, because the information needed by the commission to do its assessment and consideration is already published and available, as I have explained.

John Penrose: The point that I was trying to make is that it is a question not of what information is available but of what the commission does with it. The value of the Turner commission was in what it did with the information that it received and the analysis that it created, providing the foundation stone for the consensus.

James Plaskitt: Yes, but I am afraid that I think this analogy is quite weak when subjected to intense scrutiny, in terms of what we asked the Turner commission to do, which was a very long-term piece of work on a fundamental review of policy on pensions provision. That is something quite different from crunching numbers on accounts within public sector pensions, and I am not convinced that the analogy holds up.
Given the measures that we already have in place to ensure the transparency of the public sector pension schemes, it is not clear to me what an independent commission could add.
I remind hon. Members that we have been keeping all major public service pension schemes under review since the pensions Green Paper was published in 2002. As a result of these reviews, reforms in the major public sector schemes have been proposed, and they will ensure the long-term sustainability of these public service schemes. Reforms will introduce safeguards to ensure that schemes remain affordable and sustainable into the future. The cost-sharing mechanism will ensure that any future increases in costs will be shared fairly between employers and employees. The cost-capping mechanism will impose an upper limit on the employer’s contribution and thus the potential cost to the taxpayer. Those reforms address, I think, the point made by the hon. Member for Weston-super-Mare about a potential two nations.
In summary, I hope that the hon. Member for Yeovil is persuaded that we have the necessary mechanisms in place to ensure that scrutiny of public sector schemes can and does take place. I also hope that I have assured him that we have the right reforms in place to ensure the sustainability and affordability of these schemes in the future. I therefore hope he will agree to withdraw the motion.

David Laws: I am grateful to the Minister for his brief summary of the Government’s case. It was a little briefer than I was anticipating, given that we are talking about 2 per cent. of the whole of Government expenditure. He made, I think, three points, and I shall deal very briefly with each.
The Minister’s first point was that there was lots of information already hanging around out there in the resource accounts that we could all trawl through. The Work and Pensions Committee called for an
“independent commission to evaluate the future terms benefits of financing public sector pensions”,
which requires not only figures but some kind of evaluation. The hon. Member for Weston-super-Mare put it quite well when he pointed out that the Minister’s arguments on those points could have been used against establishing the Turner commission, and are presumably the automatic default of all Governments when invited to set up commissions. I hope that the Minister will not rule out for all time going down that route, given the success of the Turner model.
The Minister’s second argument was that we were not talking about all that much money—it was affordable and sustainable. He talked about an increase from 1.5 to 2 per cent. of GDP, which is slightly lower than the figures that I have seen of 2.1 or 2.2 percent. Without splitting hairs over the odd 0.1 or 0.2 percentage points, I still fail to see how he can be so casual about sticking on an extra 0.5 per cent. of GDP when every time the poor old hon. Member for Northampton, North pops up with a sensible and prudent amendment that would spend the odd half a billion pounds there is hysteria from the Front Bench. The Minister is talking about £7 billion.

James Plaskitt: Does the hon. Gentleman accept that the figures I gave in relation to public sector pensions and the rise over that period are entirely consistent with overall pension spending, which will rise from 5 to 6.5 per cent. of GDP by 2050?

David Laws: Well, if the Minister looks at the bottom line on state pension expenditure, as we have discussed a number of times, he will find that the share of the state pension architecture will fall from 6.2 to 6.1 per cent. over the next decade. At the same time, the share of public sector pensions will go from 1.5 to 2 per cent. according to his figures.

James Plaskitt: Perhaps we can clarify this confusion once and for all—I hope so. The hon. Gentleman needs to focus on two lines of the published table. At the bottom of the table, which can be found on page 101 of the regulatory impact assessment, there is a line entitled “Total pensioner benefit” that starts with 2008 at 6.2 per cent. and ends with 2050 at 7.3 per cent. He will see that along the way there is a reduction in the figure of 6.2, as he has mentioned, to 6.1. As we have explained to him a number of times, that is the result of the equalisation process. If he moves three lines up to the line entitled “Total Pension Benefits”, which takes out of consideration issues to do with housing and council tax benefit, attendance allowance and disability living allowance, and focuses on the pension benefit element, he will see a line that begins with 5.1 per cent. of GDP in 2008 and rises to 6.5 per cent. by 2050. The dip to 5 per cent. lasts for only three years—2010 to 2012—which emphasises my point that that dip is down to the equalisation process that will take place at that time.

David Laws: I cannot remember now whether that was a speech or an intervention.

James Purnell: It was Lawsesque.

David Laws: A Lawsesque intervention, perhaps.
I rest my case. The Minister has acknowledged that the bottom line of page 101, which lists total pensioner benefits, reads “6.2, 6.2, 6.2” and then goes down to “6.1, 6.1, 6.1”. It does not increase above that level until after 2020, and that is my point. Over that period, while total pensioner benefits are going sideways to down, the expenditure on public sector pensions is going up, up and away. It is no use the Minister saying that we will strip out this or that—we are looking at the total pensioner benefits. Even if we go to “Total Pension Benefits” and ignore some of the other stuff, that line does not go up until after 2020 either. I do not think that that is his most powerful argument.
There is a contrast between the prudence or mean-mindedness in investing in the state pensions architecture, which is supposed to be there for every single one of our fellow citizens, and the totally relaxed attitude to blowing away another 0.5, 0.6 or 0.7 per cent. of GDP when it comes to the benefits for public sector workers, including us.
The third point is the one that the hon. Member for Weston-super-Mare made in his good speech, pointing out that we are in danger of having two-nation pension provision in the future. Not only will the public sector have pension schemes with much higher levels of pension benefits and contributions, but they will be relatively low-risk because they will be based on final salary. We might find that people in the private sector experience the undesirable and contrasting effect of the enormous transfer of risk from employers and the state to individuals themselves, along with much lower levels of contribution. If anything will undermine the sense of consensus on pensions, it is that grave sense of injustice, which already exists.

Andrew Selous: It is useful to bring one other facet into the debate. In recent years, public sector pay has run slightly ahead of private sector pay. That is an important factor in the overall equation.

David Laws: That is a good point. The Pensions Policy Institute has drawn attention to that. It is one of the things that the commission could look into and about which it could inform the debate properly to ensure that we compare individuals in different professions on a like-for-like basis. It is another reason to accept the new clause, which has its origins in the Select Committee report. Because the Minister has not entirely satisfied me, this will be the last new clause or amendment that I press to a Division.

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 4, Noes 10.

Question accordingly negatived.

New Clause 26

Combined pensions forecasts
‘The Secretary of State shall publish proposals, no later than 1st April 2008, for the delivery of accurate combined pensions forecasts.’.—[Mr. Laws.]

Brought up, and read the First time.

David Laws: I beg to move, That the clause be read a Second time.
I am afraid it is me again. We are making good progress this afternoon, and I am delighted to have had the support of several hon. Members on the last new clause. The last time it was debated or discussed, the hon. Member for Runnymede and Weybridge (Mr. Hammond) said that it was a silly Liberal Democrat gimmick, so I think that I am making some progress in convincing other colleagues of the strength of my party’s policies.
We now come to new clause 26, and I shall start this brief debate, Mr. Gale, by asking how you would feel if in the near future you received through your letterbox an orange envelope with a Swedish postmark. You might be tempted to stick it under the newspaper on your breakfast table, unsure of what it might contain.

Roger Gale: Order. I might be terribly excited, but I am not prepared to be drawn into the debate.

David Laws: I shall not draw you into it any further, Mr. Gale, but I shall enlighten the Committee by informing you that that is the way that in Sweden you would be informed about your future state pension and, I believe, private pension entitlement. Indeed, the Secretary of State confirmed to the Select Committee on Work and Pensions that he recently visited Sweden, and saw for himself the orange envelope that is distributed to pensioners there.
Our Government are looking into the matter as a result of its having been raised in the Select Committee’s report. In their response to that report, they stated:
“The Government anticipates that DWP will continue to provide information about different types of pension saving, and this will include personal accounts. The Government will be working with external stakeholders to develop an evidence-based information strategy for communicating information about pensions and personal accounts over the next year.”
That is welcome, because the more people know about how much pension they are likely to end up with in retirement, the more likely it is that they will be energised into making pension provision—perhaps. At the moment, there is a great deal of uncertainty about how much people are going to receive in retirement, and that adds to individuals’ complacency and lack of interest in their own provision.
On the other hand, we know how difficult big Government IT projects can be. My hon. Friend the Member for Northavon (Steve Webb) tells me that he believes that the Government were looking into the matter a few years ago, but discovered that such was the complexity of the pensions system, with all its means-tested benefits, that it would be extremely difficult and dangerous for the Government to make forecasts about people’s entitlements. He said—I am sure that the Minister will confirm whether it is true—that the Department had cold feet for a little while about such forecasts.
 Mr. Waterson rose—

David Laws: Perhaps the hon. Member for Eastbourne, whose experience is longer than mine, can help the Committee.

Nigel Waterson: I remember being shown a prototype of the online pension planner with the hon. Member for Northavon, who was doing the hon. Gentleman’s job at that time. Did he notice the Government’s recent announcement—I think it was in response to a question from me—that they were abandoning work on the online pension planner, having spent some £3 million or £4 million on a project that had gone nowhere?

David Laws: The hon. Gentleman is right. He helps to clarify the point that my hon. Friend the Member for Northavon made. That shows some of the policy and IT dangers that there are in making such forecasts. This brief debate is an opportunity to hear from the Minister about how the work is progressing. It is also an opportunity to clarify whether the Government’s ultimate objective is to ensure that in future people get an indication of both their state pension entitlement and their personal entitlement, including personal accounts. Alternatively, do the Government feel that at some stage they might pursue the obligation in relation to the state pension forecasts, and impose obligations on those who provide occupational and personal pensions to provide separate forecasts for those? This is a probing new clause, and we look forward to hearing from the Minister.

James Purnell: As the hon. Member for Yeovil said, we have been providing state pension forecasts for many years. In 2003, we started targeting those who had not received or requested a forecast. Providing people with a forecast is one way of making them aware of how much they will get in retirement, and we hope that it also stimulates extra saving by people who are not saving enough.

Andrew Selous: I know that the Minister has barely got into his stride, but I am interested in those forecasts, and should like to take him back to the debates that we had on deficiency notices. Is any mention made in the forecasts that are sent to people of the fact that they could pay voluntary national insurance contributions where they have a number of jobs that do not individually bring them above the lower earnings limit?

James Purnell: I am afraid that I do not know the answer, so I shall add to the hon. Gentleman’s voluminous correspondence—but not before the end of this Committee’s proceedings, unless a missive is passed to me.
The forecasts that I was talking about provide information, together with a projection of private pension entitlement. By the end of December 2006, more than 9.7 million combined pension forecasts had been issued, covering both state and private pension entitlement. I hope that that reassures the hon. Member for Yeovil that the Department takes seriously its obligation to provide people with information. We are of course looking at pension forecasts in the light of the Select Committee’s recommendations, and in the light of personal accounts and the need to ensure a co-ordinated approach to informing and educating individuals during the reform transition period and beyond. We are currently looking at the role that pension forecasts play, both in assisting people to plan for their retirement and in the context of personal accounts. As has been mentioned, we are working with the Treasury on financial capability in general and generic financial advice in particular.
When personal accounts are up and running, scheme members will of course be provided with an annual statement of their rights. We shall consider proposals on combined pension forecasts as part of those wider considerations. I am about to sit down; if the hon. Member for Yeovil has a question, I should be very happy to take it. Otherwise, I urge him to withdraw the motion.

David Laws: I was tempted to intervene on the Minister, but given that new clause 26 is probing, I decided not to. There are lots of issues to do with how the Government will deliver the forecasts, how they will integrate them with personal accounts and how frequently the forecasts will be sent out. There might be other ways for the Minister to supply us with that information, so I hope that we can return to the issue at a later date. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 27

Pension credit disregard
‘The Secretary of State shall bring forward a report, no later than 1st April 2008, on the labour market disincentive effects of the operation of the Pension Credit system, for people over entitlement age for Pension Credit, in employment.’.—[Mr. Laws.]

Brought up, and read the First time.

David Laws: I beg to move, That the clause be read a Second time.
The new clause is about the pension credit disregard. It would require the Secretary of State to bring forward a report no later than 1 April 2008 on the labour market disincentive effects of the operation of the pension credit system for people over the age of entitlement to pension credit who are in employment. The new clause is a probing amendment, to see whether the Government will respond to the recommendations of an earlier Work and Pensions Committee report on pension credit, back in the 2005-06 Session, in which the Committee repeated its previous recommendation that the Government should reconsider the treatment of earnings and pension credit, taking particular account of the number of pension credit claimants who might wish to engage in paid work. The point is that currently large numbers of people who pass the age of 60 have a pension credit entitlement. The disregard for work for those people who receive pension credit is £5 a week, but it has not been changed for quite a number of years.
An important part of the Government’s solution to low incomes in retirement seems to be a quite reasonable expectation and aspiration that people should seek to work on for longer, at ages that are traditionally associated with retirement. It seems ironic that, because of the operation of the means-tested pensions system and the pension credit, there is quite a  powerful disincentive for people in that situation to carry on working. The Select Committee recommended that the disregard, which has remained static for so long, should be reviewed. If it is not to be reviewed, it would be interesting to know whether the Government have any other ideas about how to remove the disincentives for people in those circumstances.

James Purnell: Given that the hon. Gentleman’s policy is to abolish pension credit, what would be the effect of that on people aged between 60 and 65 who currently receive it?

David Laws: We have never said that we would abolish every element of means-testing in the entire pension system. We said that we would massively reduce the number of people on means-testing, back to below 50 per cent.

James Purnell: I thought that the hon. Gentleman’s leader had said that he was committed to abolishing pension credit.

David Laws: The Minister might be confusing that with the state second pension, which we are committed to phasing out in the long term, respecting the existing accruals, so there is a misunderstanding. I was about to bring my comments to a conclusion, but it would be ungenerous not to give the Minister an opportunity to intervene again on me, as I have often done so on him. However, with those comments, I now hand over to him for his formal response.

James Purnell: I shall happily write to the hon. Gentleman about that. From memory, I think that there is a clear quote from his leader about abolishing the state second pension, and perhaps the savings credit as well. I shall be interested in the hon. Gentleman’s answer on that issue and in what he would do with the carer and disability premium in pension credit, an issue that he still has not clarified. He could tell us now if he wanted; it is our last day.

David Laws: Come to my seminar.

James Purnell: Perhaps he will tell us on Report.
The new clause relates to state pension age equalisation. Men aged between 60 and 65 get pension credit because we have to make it available to men and women at the same age. We had to choose between the ages of 60 and 65 and we decided to go for 60.
On Tuesday, we had a good debate on the overall issue of the state pension age, but I want to correct something that I said during it. The hon. Member for Weston-super-Mare asked me to confirm whether the projected increase in life expectancy for non-manual workers, based on the DWP’s extrapolation from ONS data, meant that the gap in life expectancy between manual and non-manual workers was projected to narrow. I replied that the gap had narrowed in the past and, if extrapolated forward, would continue to narrow. I am afraid that that was completely wrong. The truth is that the life expectancy gap between manual and non-manual workers has grown in the past few years; I was looking at the projected decrease in the life expectancy gap between people in Scotland and England.
 ONS projections indicate that life expectancy for the average man in Scotland will increase more rapidly than elsewhere in the UK. Although the life expectancy gap between men in England and in Scotland increased between 1980 and 2006, it is projected to narrow between now and 2050. The figures suggest that longevity may improve more quickly among manual workers, whose life expectancy is currently below the average, although I would not wish categorically to state that that will be the case, given the absence of robust data.
 Let me return to the substance of the new clause. As I said, pension credit has to be available to men and women at the same age and is therefore available to men at age 60. Clearly, the availability of the guarantee credit element of the pension credit can be perceived as a disincentive to work for men aged 60 to 64. Although unemployed men in that age group are technically of working age and are entitled to claim jobseeker’s allowance, they are also entitled to choose to claim pension credit. By so doing, they bypass the conditionality elements of jobseeker’s allowance that would require them to engage actively with the labour market.
The income that such men receive is less than what they would earn from working full time, by as much as £46 per week for those working 30 hours per week at the minimum wage. However, the pension credit system enables men over 60, some of whom may face considerable barriers to work, to withdraw from the labour market. As I said, pension credit is available for men at age 60 because of the provisions on equal treatment with women in the State Pension Credit Act 2002. That Act links the qualifying age for the guarantee element of pension credit to women’s state pension age, so by 2020 pension credit will no longer be available to working-age men and its labour market disincentive effect will have been nullified.
The Government’s policies for increasing the labour market participation of older workers centre on increasing the choice and opportunities for individuals to work and plan for retirement. In line with that approach, pension credit is one of the qualifying benefits for the new deal 50-plus. So although pension credit claimants are not required to search for work, they are free to do so and are eligible for extra support through Jobcentre Plus.
 The hon. Member for Yeovil raises an important issue: extending working lives is an important goal. If we succeed in increasing the employment of older workers by 1 million, we will also increase GDP significantly and reduce poverty. I understand the valid reasons behind his amendment. I shall be happy to come back to the House if there are further developments, although I do not think that a full report would be justified at this stage. As we have said before, we are constantly considering our policies on extending working lives. If the hon. Member for Yeovil or the Conservative Front Bench have any suggestions, we would be happy to look at them. With that, I urge him to withdraw the motion.

David Laws: I am not sure whether to be encouraged by those comments. My new clause was valid and I was raising important points—it all sounded quite exciting and unexpected. I was anticipating the normal knockabout stuff. We heard a degree of discomfort from the Minister. He said that this slightly anomalous situation will be extinguished in the fullness of time by the women’s pension age equalising with the male pension age; in the meantime we are left with the slightly odd situation where the Government are trying to encourage people into employment but allowing them to take the pension credit from age 60 and, through the operation of the means-tested benefit system, creating a disincentive to their taking employment.
The Minister is clearly in some discomfort as a result of the tension between the reality and Government policy. He did not say anything about the possibility of increasing the disregard, unless I missed that. It does not look as if he wants to intervene on me now to clarify that. I will simply have to accept that the door was not slammed completely in my face. I will have to pretend that it was a triumph and I will return to this at a later stage. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 28

Removal of overlap between carers’ allowance and state retirement pension
‘The Secretary of State must make regulations to amend the Social Security (Overlapping Benefits) Regulations 1979 (S.I., 1979, No. 597) which will have the effect of removing the overlap between carers’ allowance and state retirement pension.’.—[Ms Keeble.]

Brought up, and read the First time.

Sally Keeble: I beg to move, That the clause be read a second time.
The new clause touches on people’s inability in retirement to get the carer’s allowance—an issue that has been of great concern to my constituents, especially women. The change proposed in the new clause could be made by regulation, but it is important to debate the subject now.
 I understand the reasons for saying that people on the state pension should not get carer’s allowance because it is not payment for caring, but replacement of lost earnings. As pensioners are judged not to be working, they cannot get replacement of lost earnings. That is bitterly resented both by people who have looked after their spouses for a number of years and who lose their carer’s allowance once they reach retirement age and by people looking after disabled children. I have had a number of cases of women who are looking after adult children with learning difficulties, mental health problems, or physical disabilities.
People feel a great sense of injustice. For a number of years they have cared for others. They have often given up work and made it their life’s work to look after a spouse, but suddenly when they reach retirement age they hit the buffers and their income goes down, often just at the point when the need more money. At the same time, if they have mobility impairment, they cannot get access to the mobility components of disability living allowance.
 Let me give an example of someone who is particularly hard hit by this combination of factors. A woman in my constituency had spent all her working life with Barclays. She gave up work early to look after her husband, who was in very ill health. I cannot remember exactly what her benefits were, but she certainly got carer’s allowance. When she reached the pension age she lost that. At about the same time the car that she used to drive her husband to his hospital appointments broke down completely. She came to me because she could not afford to get it repaired. She had all those difficulties getting to the appointments and her income had gone down because she had lost part of her allowances. In struggling to work out what to do, it also transpired that she had very severe mobility impairment herself, because she had profound disabilities to her feet. However, she had never got that assessed and had never claimed any disability benefits, which she would almost certainly have got. Because she was also retired, she could not get those benefits, either.
 The mere fact of reaching a certain age, plus the accident and the car breaking down, had turned her from being the mainstay of her family and for a neighbour who was ill as well, with a modest but reasonable level of income, to somebody whose income had gone down, who had lost her mobility, and who was completely unable to access any help from the state, purely because of her age. She resented that most bitterly.

Andrew Selous: It is extremely helpful to have a real-life example, but will the hon. Lady explain in a little more detail why that lady’s income had gone down? Was she not in receipt of a pension or pension credit that might in some way have compensated for the loss of her carer’s allowance?

Sally Keeble: I was going to come to that. No, she was not in receipt of that. I cannot recall all the details of her exact circumstances, but the two things that really grated with her were, first, that she had lost her carer’s allowance and, secondly, that she had gone through her life with a very severe disability that she had, quite remarkably, managed to hide. When she was driving the car, her feet could not reach the pedals properly; she needed a properly adapted mobility vehicle, so how she managed to drive everybody around to all the appointments, goodness knows. However, purely because of her age, it was impossible to start to resolve any of the difficulties. The problem was not just her income, but the well-being of a number of people who were dependent on her and who were affected by what happened. She was one of the people who found herself most aggrieved about the retirement age cut-off point for certain benefits.
Quite a lot of the debates throughout this Committee stage have been about people’s changing lives and circumstances, particularly those of women, and the way in which the pension system should adapt to become fit for purpose and to meet people’s needs in those changing circumstances. Among the arguments that have been made is, first, that there should be equity and that women’s role in the workplace and as carers should be recognised much more substantially, and secondly, that people should go on working for longer and should not regard retirement as some sort of cliff edge that they go off and spend the rest of their lives as semi-citizens.
 I welcome that, and certainly my constituents have always had the most remarkable work ethic. Both men and women have worked and have done so post-retirement, so it seems particularly unfair that we are saying to people that they should not regard retirement age or state pension age as the end of their lives and they should carry on working and participating—we even have a new deal for older workers—but we then say, “By the way, you are not going to get carer’s allowance, and if you suddenly become disabled, and your mobility decreases, you are not going to be able to get help there.” That seems to be an absolutely basic inconsistency.
 My hon. Friend the Minister will remember that, in response to my amendment that proposed spending an extra £14 billion, he said that the research had shown that people wanted the biggest increase in income directly after retirement. That surprised me, because I thought that people wanted more money when they were older, but that is what he said the research showed. Having a cut-off point for carer’s allowance and disability benefits therefore seems to be particularly counter-productive. On the mobility components, people now have the positive expectation that they will be mobile when older. They do not expect to reach retirement, put their feet up and never drive a car again.
The rule about the overlapping benefits runs counter to that. I understand that, of course, people can get the carer’s component of pension credit—some 200,000 people do already. It would be helpful if my hon. Friend would say whether there is any information on under-claiming because, until this Committee, I did not know about the disability or carer’s components. I have done a huge amount of take-up work in my constituency in order to encourage people to claim, and if there is under-claiming, we need to ensure that people know about those components.
Not everybody gets pension credit and some only get the savings element. I am not sure whether the carer’s component can go to those who only get the savings credit. However, quite often, although a husband might be disabled or ill when older, he could still have a good income from a work pension. It by no means follows that the carer, or couple, will always be entitled to the carer’s component of pension credit. I should be grateful if my hon. Friend would respond to that point. In particular, will he explain the rationale for the cliff edge that means that when someone retires, although they might be expected or encouraged to continue to work, they will not continue to benefit from support to replace lost earnings?

Andrew Selous: Not for the first time the hon. Member for Northampton, North has rendered a service to the Committee by raising an important issue. It has certainly been raised with me by a number of my pensioner constituents, not least by the Dunstable and District Association of Senior Citizens, which I meet regularly.
As the hon. Lady said, her new clause would remove the carer’s allowance and the state retirement pension from the overlapping benefit rule, which says that it is not possible to receive more than one earnings replacement benefit at the same time. It does not just apply to those two benefits, but to contribution-based jobseeker’s allowance, incapacity benefit, maternity allowance, widow’s or bereavement pension, widowed mother’s or parent’s allowance and severe disablement allowance.

Sally Keeble: This might be a cheap point, but I do not think that maternity benefit comes into the equation of state pensions.

Andrew Selous: The hon. Lady is, of course, generally right, but in our advanced scientific times, we do read the occasional story in the newspapers of such things happening. However, I take the general point that she is quite rightly making.
On the specific amounts of money, I understand that in 2006-07, carer’s allowance is £49.65 a week, which is a significant income for many pensioners; losing it would be a real blow. As the hon. Lady said, it is possible for those entitled to carer’s allowance to receive the carer’s addition in pension credit, which I think is £26.35 a week, when they become entitled to a state retirement pension. That represents a net loss of income of £26.30 a week. One would hope that that would be more than made up by the receipt of state retirement pension—although that will obviously vary from case to case—or, perhaps, by the receipt of pension credit. Will the Minister, when he responds, address what action the Government are taking to help more people take up their entitlement to the carer’s addition within pension credit?
That issue has been raised by the Select Committee, when Jim Dickson of Lancashire county council’s welfare rights service gave evidence on that point and specifically called for greater liaison between the carer’s allowance unit and the Pension Service. He also made the practical point that, in order to be entitled to the carer’s addition in pension credit, pensioners have to fill in the complete carer’s allowance form as if they were applying for that allowance, when they are obviously not entitled to it if already in receipt of state retirement pension. Perhaps a simplified form could be organised for people who are already in receipt of state retirement pension.

David Laws: Is the hon. Gentleman’s position that people should, once they have got to retirement age, still be able to claim carer’s allowance on top of the pension allowance?

Andrew Selous: No; that would be a huge spending commitment. If the hon. Gentleman is proposing to get rid of the overlapping benefits rule, I hope that he will tell us how he would fund that. We would probably all love to go that far, but it is a question of cost, is it not? So, I am not proposing that but focusing on the important issue of ensuring maximum take-up of entitlement—for, as the hon. Member for Northampton, North quite properly said, many people do not realise that they can get the carer’s addition. They know that they are not entitled to carer’s allowance and think, “That’s it”; many then suffer a loss of income that need not be as severe as it is. The issue is: how can we get the carer’s allowance unit and the Pension Service dovetailing together to ensure greater take-up? I look forward to hearing what the Minister has to say.

James Purnell: Well, it is not quite a golden rivet, Mr. Gale, nor indeed a silver one, but it may be a silver foil rivet in my telling the hon. Gentleman that, this spring, the Pension Service plans to introduce an additional question in the pension credit application process to identify relevant carer responsibilities in order to invite the customer, where appropriate, to claim carer’s allowance using a new, shortened claim pack specifically for people of pension age. This is the last but one clause, Mr. Gale, but we have added value.
I am genuinely disappointed that the hon. Member for Yeovil did not make a speech in that debate. He could have told us his proposals on the carer’s element of pensions.

David Laws: Will the hon. Gentleman give way?

James Purnell: I will make a deal and give way to the hon. Gentleman if he tells us what his plans are for the carer’s element in pension credit. Will he do that?

David Laws: I was going to ask the Minister whether he understands that I am not supporting this expensive new clause 28. In my earlier intervention, I was merely trying to find out what the hon. Member for South-West Bedfordshire had been telling the Dunstable pensioners group, which sounded intriguing.

James Purnell: I will take it that the hon. Gentleman did not make a speech to cover up his plans to take the carer’s element from people on pension credit. That is obviously his secret plan; otherwise, he would deny it.
 My hon. Friend the Member for Northampton, North is a long-standing and passionate campaigner on the issue of carers, and I am grateful to her for giving us an important opportunity to debate carer’s allowance. This goes to the heart of what carer’s allowance is for. Some people regard it as a payment for caring, but that is not the case when it is, in fact, a benefit that provides income maintenance for people who are unable to work full-time because of their caring commitments; that is an important distinction.
When Barbara Castle introduced what was then invalid care allowance she told the House that it would
“provide new, non-means-tested help for those of working age who are deprived of the opportunity to earn their living and who have no rights under existing contributory insurance schemes.”—[Official Report, 21 November 1974; Vol. 881, c. 1555.]
Carer’s allowance, the successor benefit to the ICA, is designed to provide an income to a person who, because of caring commitments, cannot work full-time. Conceptually, that puts it on a par with other benefits that step in to provide help when, for some reason, the mainstay of an income from work is not available. There are several benefits, such as the widowed parent’s allowance and incapacity benefit, for which the outward contingency may differ but whose purpose, replacing income, is a constant. In those circumstances the overlapping benefit rules operate so as not to duplicate payment.
I am describing a fundamental principle of insurance. If my hon. Friend’s car were stolen and burned, she would not expect to receive the value of the car twice over just because she had had it insured against both fire and theft. In the same way, a person not working for two reasons—because of caring commitments and because of having reached state pension age—should not expect to be paid twice in full. I appreciate the fact that an individual can work and still receive the state pension, but that does not alter the fact that the purpose of the state pension is to provide an income in retirement.
We are entirely sympathetic to my hon. Friend’s aims of ensuring that the contribution of carers is properly recognised.

Sally Keeble: Does my hon. Friend accept that a lot of women do not get the state pension? They might have got carer’s allowance but not qualified for the state pension. The idea that when they retire they necessarily get the state pension does not work, which is one reason why there is such a grievance among so many women about the fact that when they hit retirement age they hit the buffers and lose everything.

James Purnell: At the risk of having to correct myself again, if carer’s allowance gives people more than they would get from the state pension and they are not entitled to pension credit, they can keep their carer’s allowance. In answer to my hon. Friend’s main point, which was valid, the majority of women in that situation would be able to claim pension credit, including the carer’s element of it. That is how we deal with the situation of women such as those whom she talked about. I hope that I have avoided having to write to the Committee again.

Sally Keeble: I am sorry to press the matter, but one issue to consider, which has driven the debate on women’s pensions, is equity. If a woman works but does not qualify for a state pension, she might then lose her carer’s allowance. Although her husband might have a reasonable pension entitlement, she will therefore have little or no income despite having been completely financially independent for all her adult life.

James Purnell: My hon. Friend is right that one of the key thrusts of the Bill is to give women independence in retirement. My point is still valid: a woman in that situation would at least be able to keep getting the same amount of carer’s allowance. If her state pension were less than she was getting in carer’s allowance, she would keep the latter. We have introduced that.

Sally Keeble: She would keep it?

James Purnell: Yes.

Sally Keeble: Post-retirement?

James Purnell: Yes, post-retirement.
I assure my hon. Friend that we are sympathetic to her aim of recognising the contribution of carers. Indeed, a large part of the Bill is about doing exactly that. I am sure that the debate on the matter will continue on Report and in another place. The carer’s credit provisions that we are making and the reduction in the number of qualifying years to 30 will make a great difference to people who care, whether for children or for those who are sick or disabled. As a consequence of the Bill it will be possible to build up a full entitlement to the state pension entirely through caring contributions throughout one’s life. That is an important change.

Sally Keeble: Is it for the state second pension or the basic pension that the carer’s credits will have to go on for 43 years, not 30 years?

James Purnell: That is for the state second pension.
With that, and without resorting to my brief about the cost of the new clause, I urge my hon. Friend to withdraw the motion.

Sally Keeble: I shall do so, and I look forward to seeing the proposals for work on the take-up of the carer’s element of the pension credit, which will benefit a lot of women. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 31

Report on tax relief on pensions
‘The Secretary of State shall, not later than 1st April 2008, prepare and publish a report on tax relief on pension contributions, namely—
(a) the annual cost to the Treasury of those reliefs, including projections for the following five tax years, and
(b) the extent to which the existing tax relief on pensions is, in his opinion—
(i) economic,
(ii) properly focussed, and
(iii) comprehensible.’.—[Mr. Laws.]

Brought up, and read the First time.

David Laws: I beg to move, That the clause be read a Second time.
I said this morning that a couple of dogs had not yet barked in the Committee. This is one of the two dogs—the other was the issue of public sector pensions. I was tempted not to raise this particular issue because it has not been fundamental to the debate on the Bill and was a relatively modest part of the Pensions Commission proposals. Yet when we consider how much money is at stake in pension tax relief and how devastating the Pensions Commission’s second report was in its criticism of the Government on this matter, it would seem a little odd to complete our debate without at least touching upon this issue. In that report, the Pensions Commission concluded that pension tax relief is costly, poorly focused and not well understood. It is also true—and I anticipate that we will hear this from the Minister in a few moments—that the Pensions Commission said that it would be quite complex to change pension tax relief and did not make recommendations for immediate changes.

James Purnell: Does the hon. Gentleman recognise that the report actually said, on page 319, that it was “very complex”?

David Laws: Yes, it said it was very complex but also that it would not recommend changing it in the short term—in other words, in the next few years. It did not say that it was so complex that people of the Minister’s brilliance and all those in the civil service, the Treasury and the Department for Work and Pensions could not start doing some work on this in order to produce a better system.
Therefore, I hope that the Minister will not use that as an excuse not to take this issue full-on, although I fear that he might. I anticipate a speech in which he will say that this is a matter for Treasury Ministers, not for his Department. He will say that this is extremely complex and difficult to deal with, that other changes to the regime of pension tax relief are taking place and that it would be imprudent to introduce other measures at the same time, as it might destabilise them. I have seen this speech outside; I have read it.
Despite all that, I will not be knocked off course. Not only did the Pensions Commission come up with this devastating criticism, but the right hon. Member for Birkenhead (Mr. Field), in his evidence to the Work and Pensions Committee, said he very much hoped that this issue would be pursued. The Select Committee itself asked the Government to look into that.
What I want to find out from the Government today is not the bit about the complexity—because I know that bit, have already read it and am probably going to hear it again—but whether the Minister agrees with the conclusion of the Pensions Commission report that this tax relief is costly, poorly focused and not well understood. The main issue will not be whether it is costly or well understood, because we already have information on that, but how focused, fair or unfair it is. We have Government figures on the cost of pension tax relief and they are pretty significant, which is another reason why we could not leave this whole debate without airing the issue.
In 2005-06, the net cost of pension tax relief, after clawing back the money on tax from pensions in payment, will be approximately £14.3 billion. That must be something north of 1 per cent. of GDP, which is quite a lot of money. That figure has increased by almost £2 billion since 2004-05. It is up by something like £5 billion from 2001-02, which is a pretty significant increase.
If some of this week’s newspaper reports are correct that the demand for pension products is increasing as a consequence of the recent simplification of pension tax relief, we may find that the net cost of pension tax relief continues to rise quite rapidly in the future. Therefore, it is quite a large element of total tax relief and very large in relation to this whole debate.
We also know from the Pensions Commission’s excellent second report that pension tax relief is not well understood. Page 317 of the report provides two very useful charts, which show basic rate and higher rate taxpayers’ understanding of how pension tax relief works. Almost half of basic-rate taxpayers had no idea about their entitlement to tax relief on their pension contributions, 26 per cent. thought it would be better than the basic rate and only 17 per cent. got it right at the basic rate. Higher rate taxpayers, as one might expect, were a little better informed about the enormous benefits of tax relief to them, but even there only 28 per cent. got it right that they would get a 40 per cent. rate of relief. Almost the same figure as for basic rate taxpayers, 27 per cent., could come up with no idea at all about what the tax relief was worth.
I hope that we can establish that tax relief is costly and that it is not very well understood. The issue is whether it is well focused and fair. Before I get an intervention, I should point out that it is a reasonable presumption within our tax system and, as I understand it, most other tax systems of developed economies that there should not be a double taxation of pensions. One should not be taxed on the income used to put into a pension and again on money as it is drawn out. That principle, in one way or another, is embedded in our whole savings regime. However, the Pensions Commission’s point was that we do not seem to have that kind of tax neutrality in relation to our existing system in the UK but, rather, an unbalanced system that seems to give greater relief to one proportion of the population. In crude terms, something like 50 per cent. of the tax relief goes to the top 10 per cent. of income earners and 25 per cent. to 2.5 per cent. of the income earners. That would not necessarily matter, if that simply reflected the amount of participation in pension savings by those two groups and the need therefore to neutralise the effects on taxation. However, it seems to be not simply neutralising, but actually skewing the tax system in a way that benefits people on very high incomes.
We already know that in this country we have an extraordinarily unequal distribution of income, wealth and opportunity. There are question marks about whether social mobility has been declining over recent years. So, it is very striking and also bizarre and extraordinary that we should have a tax system that the Pensions Commission considers to be skewed in favour of those people with the higher incomes. The second report of the Pensions Commission points out this extraordinary situation, which we have been discussing throughout the Bill, where those people on very low incomes potentially suffer enormous withdrawal of benefits in retirement and therefore may have their incentives to save cut away from them. In the earlier debate the hon. Member for Eastbourne talked about the effect of means-testing essentially operating as a tax on saving.
At the same time, to those people who already have a lot of money, more is given. There is an extraordinary graph on page 313 of the Pensions Commission’s second report, which shows the impact of the tax advantages on returns from savings. Looking at it, one will see an extraordinary rise in the tax advantage of saving for those people as they go over the threshold for upper-rate tax. The Pensions Commission made the issue very clear on page 312 of the report:
“The benefits of this significant cost to the Exchequer are...extremely unequally distributed”.
It continued:
“But the overall message is clear: the beneficial impact of tax relief on the rates of return of savings is much higher for higher-rate taxpayers than for basic rate or lower-rate taxpayers. And this is not simply because tax relief undoes the higher detrimental effect on rates of return which higher tax rates would impose on non-tax privileged saving: higher tax rate payers can achieve through pension savings higher post-tax rates of return than those enjoyed by basic-rate taxpayers”—
which includes those at the bottom end of the income distribution.
We have a bizarre, eccentric system. It not only uses tax relief on pensions to give a special bonus to those who already have a lot, rather than just neutralising the tax consequences, but it disincentivises saving among people with very little money, because there is so much means-testing. Enormous incentives to save are being given to people at the upper end of the income distribution. It seems bizarre that we should be giving massively generous incentives to affluent people while creating disincentives for people at the bottom end of the income distribution

James Purnell: I am following the hon. Gentleman’s speech with interest. I should be even more interested if he were to tell us what his policy was.

David Laws: I shall move on to that. I am encouraged to go further. We published a policy last year—I am sorry that the Minister missed it—to reorganise tax relief on pensions so that tax relief is paid at the basic rate and the savings are recycled as a cut in the basic rate of tax. If the Minister has an alternative we will listen to it, because there are other ways of better using the money.
Our policy would avoid the current situation, from which most Members of this House will probably benefit. We can take the enormous benefit of 40 per cent. tax relief as we save, in the knowledge that many of us will be paying only the basic rate of 22 per cent. when we retire. A large proportion of the people who receive tax relief at 40 per cent. will pay only the basic rate of tax in retirement.
 Figure 7.8 on page 313 of the Pensions Commission’s second report is an interesting graph that shows the average tax rate for people in different income bands in retirement. The average rate of about 20 per cent. applies to people on incomes of up to about £55,000 a year. Someone who has been a higher rate taxpayer during their working life has to earn an awful lot of money in retirement to miss out on that enormous freebie from saving in pension accounts. Notwithstanding all the criticisms that have been made of the Chancellor of the Exchequer for tinkering with tax relief on pensions, I should have thought that removing that anomaly, which enormously advantages the advantaged, would be extremely sensible for a Labour Government who are, on the face of it, passionate about social justice.
I know that the Minister will say that such changes are far too complicated, but in its contribution to the Select Committee inquiry, the Pensions Policy Institute said:
“Discussions between the PPI and practitioners suggest that reform”
of the type that we suggest
“would be possible. A review of value for money to the taxpayer of current and alternative systems of tax incentives for pensions and other forms of savings would help address a remaining significant policy issue.”
Elsewhere, the PPI has said:
“Discussions between the PPI and practitioners have indicated that it would be possible to resolve the problems identified in Lord Turner’s report.”
I think Lord Turner would acknowledge that he was hardly encouraged by the Treasury or other parts of Government to look in great detail at tax relief on pensions. One suspects that the Chancellor would have gone potty if Lord Turner had gone that far into the Treasury’s area.
We should not regard the Pensions Commission as having drawn a line under the issue with its conclusion that resolving it will be complex. We should note instead its criticism of the unfocused nature of the existing relief. In the Minister’s reply, I hope to hear an acknowledgment that tax relief is badly focused and that the door should not be closed to consideration of that issue.

Sally Keeble: I should be very interested if the hon. Gentleman would again go through the proposals. I am unsure about the detail. I understand that pension relief on the contributions would be capped at the basic rate. Then would the money saved be provided to broaden the band that is only taxed at 10 per cent., or would thresholds be increased? Or would it go into other forms of support for pensioners’ income?

David Laws: I am grateful to the hon. Lady for raising that issue. There are a myriad different ways in which tax relief could be redesigned. It could simply be redesigned so that it was given to every member of the community at the same rate, rather like the proposal for personal accounts where everybody gets the same rates of pension tax relief. It could be that the money saved in that way is used to incentivise saving in some other way. Our proposal is to restrict relief to the basic rate and then to funnel that money back into reducing the basic rate of tax. But it could be used for many other things.

Sally Keeble: For everybody?

David Laws: Into the basic rate of tax for everybody. But it would be open to the hon. Lady and others to bring forward their own proposals. There are plenty of other ways of doing this.
I hope that the Minister will not only give us the guarantee that he regards pension tax relief as badly focused, but clarify the purpose of pensions tax relief and whether it is to give incentives to save or whether it simply seeks to deliver neutrality in the tax system.

Nigel Waterson: I do not wish to detain the Committee long, particularly at this late stage in our deliberations, but I could not not intervene in this debate.
I apologise—although I would not wish to lull him into a false sense of security—to the hon. Member for Yeovil that I missed the policy announcement he mentioned. As with buses, however, if you miss one Lib Dem policy announcement there will be another one along at any time, probably saying exactly the opposite. I am grateful for his confirmation that indeed his party’s policy is the same as it was before the last election, which is to remove the tax relief available to higher earners for making pensions contributions. He has twitched so I will give way. [Laughter.]

David Laws: The hon. Gentleman clearly has not been following the twists and turns of Liberal Democrat policy as well as he should have been. This policy was passed a year ago. It was not the policy at the last election.

Nigel Waterson: I apologise again. I was only going on what his hon. Friend the Member for Northavon said in the House. In any case, it does not really matter, as there is no Liberal Democrat Government following that election and we are now looking to the next election.
So that my constituents among others can be absolutely clear about this, the Liberal Democrats would remove the tax relief on pension contributions for higher earners.

David Laws: And reduce the basic rate.

Nigel Waterson: Yes, well, we await some of the detail. I am amazed, if that is the case, that the hon. Gentleman has not had the courage of his convictions because, if he does not mind my saying so, his rather mealy-mouthed new clause only talks about having a report whereas it seems to me he claims to have a thoroughly worked out, hard-edged policy, which I think he might just have managed to form into a new clause, but there we are. There is always Report stage to consider.
Speaking for my party, at this crucial stage where the last thing we want to do is remove incentives to people to save into pensions for their retirement, to start fiddling with and reducing the tax relief available is exactly the wrong way to go. The hon. Gentleman is wrong when he says it is not understood. It may be true, as he indicated, that a lot of people do not understand all the complexities and the detail but they do understand the central point that if they pay into a pension fund they get tax relief.

David Laws: That is not the point I made; it was Lord Turner’s point. Does the hon. Gentleman disagree with Lord Turner’s suggestion that tax relief is poorly focused?

Nigel Waterson: Well, I agree with Lord Turner’s point that it would be, I think the phrase was, “very complex to do anything about it” but it is a luxury available to the hon. Gentleman’s party to have very complex policies because they are never going to be called upon to put them into effect in the real world.
We on the Conservative side of the Committee would have great reluctance in supporting any such proposal, even if it were actually contained in the new clause. We think it will not be well received at all among the many higher earners out there who are aware that there is tax relief and may well for that reason be saving in their pension. This is at a time when we are really worried as a party that, if anything, people need more encouragement to save into pensions, particularly with the coming of personal accounts and the whole issue of levelling down, which I will not go into again.

James Purnell: I am tempted to say that the hon. Gentleman has given my speech, so there is no need for me to do so, but I shall gild the lily slightly by saying that I look forward to the “Focus” leaflets in Twickenham, Richmond and Guildford highlighting the importance of higher-rate tax relief, explaining to people how it works and how the Liberal Democrats are going to take it away.

David Laws: And in Yeovil.

James Purnell: And indeed in Yeovil. I also look forward to seeing the detailed calculations that the hon. Gentleman will provide at his seminar. He rather gave the impression that he was going to be able to pocket £14 billion from this. As he well knows, the higher rate element of it accounts for only about a quarter, and there is no guarantee that the savings will materialise because, people being what they are, having lost one form of tax-advantaged saving, they might well find another to allow themselves to make provision for the future. Perhaps, therefore, all he will achieve is to shift money from pension saving into another form of tax-advantaged saving, perhaps housing. Given that the thrust of our debates has been to encourage pension saving, I am not sure that that would necessarily be a brilliant policy.
I am also tempted to read out to the Committeepage 319 of the commission report. I can see that you would be delighted for me to do so, Mr. Gale, but I shall just send it to the hon. Gentleman again so that he can read the bits that do not suit his argument quite so well, especially the bits that say that it would be very complex to make the changes.

David Laws: Will the Minister give way?

James Purnell: Absolutely; it will give me time to find the place.

David Laws: If it could be demonstrated that it was not very complex, would the Minister then be in favour of the change?

James Purnell: I did not have time to find the quote. However, the hon. Gentleman has again demonstrated that he is cleverer than the Pensions Commission and, indeed, John Hills, who looked into the matter in some detail. John Hills gave a lecture on this, which was posted on the PPI website—that is not the right quote. Here we are: the Pensions Commission said that it would be extremely complex to make the changes so long as there is a significant element of DB—defined-benefit—provision in the system.
The point is that, as is explained on page 319, which all hon. Members will read before the hon. Gentleman’s seminar, making the changes would deal a potentially fatal blow to defined-benefit schemes because of the extreme complexity that would be involved, the fact that individual tax obligations would have to be calculated—for every member, we think—and the fact that members who had significant increases in their salaries might be required to pay significant in-year tax bills.

David Laws: Does the Minister agree with Lord Turner that pensions tax relief is poorly focused?

James Purnell: We are implementing the Pensions Commission’s recommendations pretty much in full, and they did not include making that change. If the hon. Gentleman wants to make policy suggestions that are potentially very damaging to final salary schemes, that is very much at odds with his previous concerns during our proceedings about levelling down. We do not think that that would be the right approach, and in that we follow the Pensions Commission. I suspect that he is trying to find a sum of money that he can recycle into something that enables him to make a simple claim about basic rate tax. I am sure that the money will be spent in a number of other areas as well, such as on increasing the basic state pension, and it might fund some other policy suggestions that the hon. Gentleman has made. I do not think that that is a practical solution, and neither did the Pensions Commission, and I urge him to withdraw the motion.

David Laws: It has been an interesting debate, and this is the last new clause. I was not going to propose it until I got stuck at Basingstoke station on the way home one day, and had nothing better to do than read the Pensions Commission report. I then decided that it would be negligent to end this Committee without airing serious criticisms of the pension tax system. I anticipated, and wanted to flush out, just how conservative both sides were going to be. I wanted to test out whether all this new model Conservatism and Toynbeeism really added up to much. We found out from the hon. Member for Eastbourne that it does not. It comes down to a defence of traditional privilege: the traditional privilege of those highest earners in society who are tax-privileged and are getting an enormous subsidy to save in pensions. The Conservative party is still determined to defend that.

Andrew Selous: Is the hon. Gentleman aware that moderately senior nurses in the NHS and other people of that ilk are higher rate tax payers? Does he think they are hugely privileged people?

David Laws: The hon. Gentleman should know that the people who are upper rate taxpayers are among the 10 per cent. richest and the most affluent people in the country. The idea that we should have a pension system that gives powerful disincentives to the poorest people in Britain not to save, and gives enormous subsidies and incentives to the richest to save is crackpot. Eventually, whether or not the other parties agree, we will end up with a grand consensus based on this little phrase from Lord Turner that we have got to change the system.
The briefing will change and the Chancellor of the Exchequer will become Prime Minister and decide that this is a good idea. The leader of the Conservative party in a cuddly moment will decide that it is something that he must support too. I look forward to hearing the hon. Member for Eastbourne and the Minister eating their words and commending me for my proposal to end the immoral and wasteful system of tax relief. I detect that I may not at the moment command a majority on the Committee. With those deeply consensual words, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Ordered,
That certain written evidence already reported to the House be appended to the proceedings of the Committee.—[James Purnell.]

Nigel Waterson: On a point of order, Mr. Gale. I do not want to detain the Committee long, but it would be wrong not to say a few thanks at the end of this constructive and good-natured Committee. The golden rivet has proved elusive, except for the concession made following the intervention of my hon. Friend the Member for South-West Bedfordshire on new clause 28. We can take that away and claim a success, although the hon. Member for Yeovil will even now be drafting a press release claiming that it was all his idea.

David Laws: I have done it already.

Nigel Waterson: I should like to thank you, Mr. Gale, and Mr. Taylor, for your excellent chairmanship. I should like to thank our Clerk, who has striven manfully to keep our amendments in order, the Hansard writers, the police and the security officers and all the officials who have kindly supplied the Minister sometimes with the right quotations and sometimes not. They have supplied us all with loads of information and with loads of letters, but not all at the same time. I should like to pay an especial tribute to the Committee Office scrutiny unit who have laboured long and hard to deliver two, two-page submissions. I do not regard this Committee as having been a wonderful example of the new rules of written evidence, let alone oral evidence. But do not get me started on that.
I should like to thank all my hon. Friends and all members of the Committee. I should particularly like to thank my hon. Friend the Member for South-West Bedfordshire for his all hard work on the Committee and my own Whip who, sadly, is not here. I should like to thank my hon. Friend the Member for The Wrekin, who is not here either. I see from his biography that he is a member of the Miniature Schnauzer Club of Great Britain. I assume that he is out walking his dog today. In addition to his activities as a Whip, my hon. Friend is a bomb disposal expert—he has recently returned from Iraq—as well as working in the family firework manufacturing firm. Let us hope that he does not light the wrong blue touch paper.
We have been very honoured to have two very good Ministers. I looked on his website and saw that when asked what motivates him, the Under-Secretary of State for Work and Pensions, the hon. Member for Warwick and Leamington said:
“You need to keep the belief that there is far more good in the world than evil.”
Let us hope that this Committee confirms that view of life. The hon. Member for Solihull has experience as a prison governor and I hope that this experience has not been too different. We established in a previous debate that the earnings link was broken when the Minister for Pensions Reform was still in primary school. There has been a great historical sweep in our debates.
I thank the Government Whip for whipping the Committee with an admirably light touch. The visits to the Liberal Democrat Santa’s grotto have been interesting; I hope that the Minister has kept a running tally of the spending commitments, the prize for which must go to the hon. Member for Northampton, North who came up with a modest, probing amendment that would have cost £14 billion. I wonder whether she has considered joining the Liberal Democrats.
The hon. Member for Yeovil seemed determined to upset every aspect of the electorate, particularly higher earners, except, of course, for the Christian Brethren who, as he conceded, cannot vote for him or, indeed, for anybody else.
Finally, I had a letter from the Minister this morning that contained a sentence that should send us on our way cheerful and happy. It said:
“Cross-party scrutiny of the Bill’s proposals is an important part of deepening the existing consensus around the future of the UK pension system.”
That is a wonderful sentiment. In our case, the deepening consensus has become rather more shallow and we shall return to some of the issues on Report. I take my share of the credit for delivering this Bill entirely according to its agreed timetable. Everyone has had their say; we have considered all the important parts of the Bill with full justice.

David Laws: Further to that point of order, Mr. Gale. I thank you and Mr. Taylor for chairing our proceedings in such an excellent way and for your tolerance and patience throughout the last three weeks. I thank the Clerk, the officials who supported the Ministers and the Committee, the Hansard reporters, the police and others. I also thank the hon. Member for Northampton, North for her expensive probing amendments which, as I said earlier, allowed me to triangulate between those and the Gladstonian candle-end pinching of the hon. Member for Eastbourne and to find myself firmly on the rational centre ground of British politics.
We enjoyed the contributions made by the hon. Member for Eastbourne and his dry and frequent wit, and those made by the hon. Member for South-West Bedfordshire, who was always rational and constructive in managing the debate. We also enjoyed the Ministers’ contributions; they did not concede very much, but it was done in a gracious way, and he gave way frequently and with great tolerance. We look forward to Report and to Third Reading.

James Purnell: Further to that point of order, Mr. Gale. This has indeed been a very constructive and pleasant Committee to be part of. I hope that it will be seen as having added to the consensus. There are some issues to which the hon. Member for Eastbourne wants to return on Report, but, particularly in respect of the clauses on the state pension, I hope that there is broad agreement on the direction of travel in the reform of the pension system in the UK.
I was lucky enough to go out with the local Pension Service recently to see their work in action. We visited the home of a wonderful 85-year-old lady and on the way in, the gentleman from the local service turned to me and said, “How shall I explain your presence here? Shall I say you are a Minister or a trainee?” He then looked at me and said, “I think trainee is probably more credible, don’t you?”
The lady asked me to open a can of condensed milk for her, which is not something I had done before I must admit, certainly not with the implement that she pointed me towards. I did not know how to use it and decided to use brute force instead, with the result that I spilt condensed milk all over her kitchen. On that occasion, my trainee status cover was not blown.
 That was a long segue into an acknowledgment of the fact that both I and my hon. Friend the Member for Warwick and Leamington are both trainees here—this is our first Committee as Front-Bench Members and we have been delighted to have learned along with everyone else. Indeed, I would like to start by thanking my ministerial colleague for all his expert, overshadowingly brilliant, support during the Committee. He dealt with a large number of important clauses.
I would like to thank the Conservative Front-Bench spokesmen for their constructive and serious approach to our policies, as well as for their wit in describing many of them. I would also like to thank the hon. Member for Yeovil for being such a gracious butt of the jokes of the hon. Member for Eastbourne throughout the proceedings and for ensuring that we have been able to use all of our 12 allotted sittings. It would have been a shame had we not been able to do so. Without his contribution, we would definitely not have used a number of the sittings that the Conservative Front-Bench Members asked for.
I would also like to thank our Whip, who, as the hon. Member for Eastbourne said, is the crème de la crème of Committee whipping. He is a most experienced Whip and has dealt with us with a very light touch. He only once said to me that I had made rather heavy going of a clause, which I took to be a nuclear warning given his normal approach to such matters. I can only apologise for new clause 2, which I know is embedded in the memory of your co-Chair, Mr. Gale.
In particular, I would like to thank my officials, who have done a brilliant job. If we have appeared like a duck across the surface of the water without too much stress, it is only because they were furiously paddling underneath—they stayed up till all hours of the night dealing with people’s amendments. I hope that the Committee will join me in thanking them, as well as the drafters of the Bill. They have given us a Bill far more comprehensible than is normally the case.
I would like to thank the Clerk and all his staff as well as the members of Hansard. Not least, I shall finish by thanking all the organisations that provided so many of the briefings and amendments, and the police, who have prevented great hordes of Bosnians, the Plymouth Brethren, mothers over 60 and, in the last sitting, a whole horde of upper-rate taxpayers from invading the Committee. Without their protection the Room might have been stormed, although I cannot see them—ah, there they are, fighting off hordes of higher-rate tax-paying nurses!
Finally, I thank you, Mr. Gale and Mr. Taylor, for your brisk and effective chairmanship. I wish everyone a very good weekend and half-term break.

Roger Gale: It is one of the wonderful eccentricities of Committee work that we always end with five minutes of points of order that are totally out of order. But then, as points of order on the Floor of the House are usually out of order, I suppose that it is a convention that the House has established. As we have been completely out of order, I am interested to note that the Committee feels that I have been tolerant. Clearly, I shall have to look to my laurels.
On a more serious note, I add my thanks to the staff and Officers of the House without whom we could not do our work. I also thank every member of the Committee for making this a congenial and constructive event.

Bill, as amended, to be reported.

Committee rose at twenty-four minutes past Three o’clock.